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Journal of Economic Integration 2020 December;35(4) :609-642.
DOI: https://doi.org/10.11130/jei.2020.35.4.609
Growth and Welfare Implications of Tariff Protection―Location Versus Allocation Effects

Andrea U. Marino 

1National Institute of Statistics of Italy, Italy
2DISPO, University of Genoa, Italy
Corresponding Author: Andrea U. Marino ,Tel: +390105849716, Email: anmarino@istat.it
Copyright ©2020 Journal of Economic Integration
ABSTRACT
This paper analyzes the link between ad valorem tariffs and growth in a North-South framework, in which tariff liberalization exerts both U-shaped allocation effects (concerning the distribution of inputs across sectors) predicted by symmetric (North-North) R&D-based models, and monotonic pro-growth location effects (concerning the distribution of firms across countries) highlighted by economic geography literature. It is shown that, regardless of parameters, at sufficiently high tariffs allocation effects prevail. Thus, the equilibrium tariff-growth relationship is non-monotonic in this North-South setting as well. Numerical solutions suggest that such nonlinearities may be relevant and a potential source of misspecification bias in empirical work neglecting them. Tensions between allocation and location effects extend to the tariff-welfare link. This may be non-monotonic as well, depending on parameters. Due to static location effects, full tariff liberalization may not maximize welfare. However, this is the likely outcome under plausible parameter values.

JEL Classification
F12: Models of Trade with Imperfect Competition and Scale Economies
F15: Economic Integration
O40: General
R12: Size and Spatial Distributions of Regional Economic Activity
Keywords: Tariffs | growth | geography | nonlinearities
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